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In re Woodale Properties, Ltd.

United States District Court, N.D. Illinois, Eastern Division

February 24, 2017

In re WOODALE PROPERTIES, LTD., Appellant,
v.
AMERICAN CHARTERED BANK, Appellee.

          MEMORANDUM OPINION AND ORDER

          MATTHEW F. KENNELLY United States District Judge

         On June 1, 2016, the bankruptcy court granted American Chartered Bank's motion to dismiss the Chapter 11 bankruptcy case of Woodale Properties, Ltd. pursuant to 11 U.S.C. § 1112. On June 30, 2016, after a hearing, the court denied Woodale's motion to vacate the order of dismissal. Woodale has appealed, contending that the bankruptcy court abused its discretion. For the reasons set forth below, the Court affirms the bankruptcy court's order.

         Background

         Woodale was a single asset real estate debtor. This means that its bankruptcy estate consisted of real estate constituting a single property or project that generated substantially all of Woodale's income and on which it conducted no substantial business other than operating the real property. 11 U.S.C. § 101(51B). Woodale's single asset was a parcel of real estate located at 861-69 Central Avenue, Wood Dale, Illinois, and its sole source of income was the rental income from its tenants. Woodale operated under the direction of James Gentile, its sole owner and officer.

         The property was encumbered by a mortgage given by Woodale to American Chartered Bank to secure a $2.1 million promissory note. The note was set to mature on June 30, 2011, at which point Woodale would have an option to renew the loan for a three-year period following the loan's maturity date. On October 29, 2012, Woodale filed suit in state court seeking specific performance from American Chartered Bank on this option. On October 3, 2013, the state court held that Woodale was entitled to specific performance, and it extended the loan's maturity date to December 28, 2014. On November 21, 2014, the circuit court clarified its decision, ruling that Woodale was required to start making payments on the note to the bank beginning June 16, 2014, after which interest would start accruing on the principal amount due. In that same order, the circuit court directed Woodale to pay the bank back taxes in the amount of $125, 970.76 by December 1, 2014.

         On April 13, 2015, American Chartered Bank filed a mortgage foreclosure action against Woodale in state court. On October 19, 2015, the state court granted the bank's motion to appoint a receiver for the non-residential portion of the property. The court ruled that the "receiver is empowered with all the duties, responsibilities and powers enumerated in the Illinois Mortgage Foreclosure Law, " including being "authorized to collect all rents relating to the property." R. 101.[1] The order also directed all tenants of the property to "pay rent to the receiver" from that point forward. Id.

         On October 26, 2015, Woodale filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Section 543(b) of the Code requires a custodian or receiver of a property belonging to a debtor to turn the property over to the bankruptcy proceedings' trustee. 11 U.S.C. § 543(b). American Chartered Bank moved to excuse compliance with this requirement, asking to keep the receiver appointed by the state court in place during Woodale's bankruptcy proceedings under section 543(d)(1) of the Code, which authorizes a bankruptcy court to excuse compliance "if the interests of creditors and, if the debtor is not insolvent, of equity security holders would be better served by permitting a custodian to continue in possession, custody, or control of such property." 11 U.S.C. § 543(d)(1). The bank argued that Woodale's failure to 1) insure the property, 2) comply with the order appointing a receiver, 3) comply with the court order to reimburse the bank for back taxes, and 4) file state or federal income tax returns since 2009 rendered Woodale unsuitable to manage the property. On November 10, 2015, the bankruptcy court granted the bank's motion to excuse compliance, finding that "[i]t is in the best interest of the creditors that the receiver continue to exercise possession, custody and control over the property." R. 172.

         On January 22, 2016, Woodale filed a plan for reorganization in which it proposed to pay American Chartered Bank monthly interest payments of 3.5% on the note, with the property to be sold within five years (later amended to three) after confirmation of the plan. On March 2, 2016, the bank filed an objection, arguing that the plan was impracticable due to Woodale's mismanagement of the property. As one example, the bank noted that "[n]o rent has been paid to the Receiver by Mr. Gentile or the entity operating in Unit 178" and that "[r]ent is due and owing to the Receiver for November, 2015 through March, 2016 in the approximate amount of $15, 000.00." R.

         At a hearing held on March 22, 2016, the receiver reported to the bankruptcy court that Woodale had been interfering with his ability to manage the DuPont property. Among other things, the receiver reported that Woodale was preventing him from renting out Unit 178, saying "[Gentile is] not paying rent[, ] has stuff in an area and refuses to move it." Mar. 22, 2016 Tr. at 6:12-15. The court advised Woodale's counsel that the bankruptcy code provides "extraordinary relief [to a debtor], but it requires cooperation" and warned that "[i]f I don't get cooperation from the debtor, I'll just dismiss the case and bar the debtor from refiling. I just want you to know I don't believe in - I'm not going to chase somebody around." Id. at 7:2-8. On the issue of nonpayment of rent, Woodale contended that it was the occupant of Unit 178, stating that Gentile used the unit as his personal office to manage the property; it argued that "[t]he owner doesn't have to pay rent on his property." Id. at 10:21-22. Because it was getting conflicting information, the court directed the receiver to visit the property to determine who was occupying Unit 178. Id. at 13:23-14:4.

         On March 31, 2016, American Chartered Bank filed a motion seeking dismissal of the bankruptcy proceeding pursuant to 11 U.S.C. § 1112. In the motion, the bank asserted that dismissal was appropriate due to Woodale's continued and willful failure to comply with the order appointing a receiver.

         On April 7, 2016, a hearing was held at which the parties questioned the receiver regarding his visit of Unit 178. The receiver testified that, based on his visit, he believed that Gentile was the occupant of Unit 178, not Woodale. He indicated that there were no signs that Woodale was operating its business out of Unit 178. The receiver explained that Woodale had only one employee, Gentile, so the 5, 000-square-foot unit "would have been a misuse of space, " because "if [Woodale, through Gentile, ] was operating the property, he [could] do it in just a little small office." Apr. 7, 2016 Tr. at 18:6-10. The receiver also noted the type of equipment found in the unit, and determined that "there was [ ] nothing there that [Woodale] could use for [maintaining] the properties." Id. at 17:22-24. The receiver explained that he found several pieces of equipment in the unit that were incompatible with the contention that the unit was being used for management of the property, including a van, a snowmobile, multiple scissor lifts, a woodshop, and several computers. See id. at 16:11-19; May 18, 2016 Tr. at 10:3-11:14 (discussing the snowmobile found in the unit). The receiver advised the bankruptcy court that in his view, either Gentile or another business run by Gentile was occupying Unit 178.

         At the same hearing, the parties questioned the receiver on Woodale's claimed interference with his ability to lease other units on the property. The receiver testified that he found a tenant for Unit 176 that intended to use the space for "dead space storage, " which required Woodale, through Gentile, to remove a racking system from the unit. Mar. 22, 2016 at 10:5-12; Apr. 7, 2016 Tr. at 11:14-13:4. The receiver testified that Gentile refused to remove the racking until the court ordered him to do so. Id. The receiver also testified that Gentile had tried to lease one of the units on the property to a former tenant without consulting the receiver. R. 314; Apr. 7, 2016 Tr. at 15:17-24. The receiver explained, "I think the fact that [Gentile] put himself out as the manager and quoting rent, and at a higher rent than even Mr. Gentile thought was reasonable for the property, I think that's the issue." Id. at 25:8-12.

         On May 18, 2016, the court held a status hearing to discuss the bank's objection to the debtor's proposed plan, as well as the bank's motion to dismiss the bankruptcy case. The bank's counsel argued that dismissal was warranted because Woodale's non-compliance with the receiver, including not paying rent on Unit 178, indicated that Woodale was "playing fast and loose" with the court. May 18, 2016 Tr. at 8:22-25. The court ruled that the occupant of Unit 178, Woodale or otherwise, had to pay rent or vacate the premises. Woodale's counsel argued that Woodale should not be required to pay rent to the receiver because it still owned the property and had not lost ownership by filing bankruptcy or otherwise. Id. at 16:3-8. Counsel noted that the receiver was managing the property on behalf of and in the interest of Woodale and that the goal of the bankruptcy proceedings was to return possession of the property to Woodale. Counsel argued that requiring Woodale to, in effect, pay itself would be counterproductive to the bankruptcy proceedings. And as a practical matter, counsel said, there was no way for Woodale to pay rent because it had no source of income. Counsel suggested that if Woodale were required to pay rent on Unit 178, then the receiver should give the rents collected from the other tenants on the property to Woodale and that this, in turn, would enable Woodale to pay the rent.

         The court rejected Woodale's suggestion and stated that it was "not going to make [the receiver] pay the rent" and that instead, "[w]hoever is in that space can pay or leave." Id. at 20:4-8. The court explained that (1) it was disputed whether Woodale actually occupied Unit 178, so Woodale's arguments about ownership were inapplicable, and (2) in the event Woodale was the occupant of Unit 178, the receiver had determined that it was in the company's interest to rent the unit to an entity that could afford to pay for it. Id. at 12:20-25, 16:9-19, 19:13-18. The court told Woodale that "if you can't afford it, then don't occupy the space." Id. at 15:5-6. Following the hearing, the bankruptcy court ordered: "Entity occupying Unit 178 at the property ordered to pay Receiver Dan Hyman the sum of $6, 000.00 via cashiers or certified check by next court date for April & ...


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